Modelling economic impacts and adaptation to extreme events: Insights from European case studies

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Adaptation to climate change in Europe has only recently become a true policy concern with the management of extreme events one priority item. Irrespective of future climatic changes increasing the need for systematic evaluation and management of extremes, weather-related disasters already today pose substantial burdens for households, businesses and governments. Research in the ADAM project identified substantial direct risks in terms of potential crop and asset losses due to combined drought and heatwave, as well as flood hazards in Southern and Eastern Europe, respectively. This paper focuses on the indirect, medium to longer term economic risks triggered by the direct risks and mediated by policy responses. We present a selection of three economic impact and adaptation assessments and modelling studies undertaken on extreme event adaptation in Europe. Responding to a need for more economically based adaptation assessments, we address some relatively unresearched issues such as the understanding of past adaptation, the role of market response to impacts as well as government’s ability to plan for and share out extreme event risks. The first analysis undertakes an empirical exploration of observed impacts and adaptation in the agricultural sector in the UK comparing the impact of consecutive extreme events over time in order to determine whether adaptation has occurred in the past and whether this can be used to inform future estimates of adaptation rates. We find that farmers and the agricultural sector clearly have adapted to extreme events over time, but whether this rate can be maintained into the future is unclear, as some autonomous adaptation enacted seemed rather easy to be taken. Markets may mediate or amplify impacts and in the second analysis, we use an economic general equilibrium model to assess the economic effects of a reduction in agricultural production due to drought and heatwave risk in exposed regions in Spain. The analysis suggests that modelled losses to the local economy are more serious in a large-scale scenario when neighbouring provinces are also affected by drought and heatwave events. This is due to the supply-side induced price increase leading to some passing on of disaster costs to consumers. The simulation highlights the importance of paying particular attention to the spatial and distributional effects weather extremes and possibly changes therein induced by climate change may incur. Finally, we discuss how national governments may better plan their disaster liabilities resulting from a need to manage relief and reconstruction activities post event. We do so using a risk based economic planning model assessing the fiscal consequences associated with the coping with natural extremes. We identify large weather-related disaster contingent liabilities, particularly in the key flood hot spot countries Austria, Romania, and Hungary. Such substantial disaster liabilities (“hidden disaster deficits”) when interacting with weak fiscal conditions may lead to substantial additional stress on government budgets and reduced fiscal space for funding other relevant public investment projects. Overall, our paper suggests the importance of respecting the specific spatial and temporal characteristics of extreme event risk when generating information on adaptation decisions. As our adaptation decisions considered, such as using sovereign risk financing instruments are associated with a rather short time horizon, the analysis largely focuses on the management of today’s extreme events and does not discuss in detail projections of risks into a future with climate change. Such projections raise important issues of uncertainty, which in some instances may actually render future projections non-robust, a constraint to be kept in mind when addressing longer term decisions, which at the same time should account for both climate and also socioeconomic change.